Commercials Law: Provisions Common to Pledge and Mortgage



  • This chapter discusses the different real securities provided for under the New Civil Code, namely pledge and mortgage.
  • In these contracts, the security constitutes an encumbrance on property. 
  • It should be noted that the Civil Code provisions on mortgage subscribes to the Lien Theory under which the mortgagee takes only a lien on the property mortgaged. The mortgagee is not, as a rule, entitled to possession.
    • Note:
      • The other theories are the:
        • Title Theory 
          • The Common law theory where the creditor has the legal right of possession;
        • Hybrid Theory.
          • The creditor's right of possession arises only upon default of the debtor. 
      • See Giff's, Barron's Law Dictionary, 6th Ed., p. 348. 
  • In pledge, the encumbrance is created upon delivery. 
    • However, the Personal Property Security Act (Republic Act No. 11057) already repealed the provisions on pledge. 
    • Notwithstanding such repeal, this chapter remains relevant firstly, because the PPSA does not apply to mortgages/security arrangements involving real property. 
    • Secondly, by express provision of the PPSA, the prior law — that is, the law that existed before the PPSA, which includes the New Civil Code provisions on pledge, chattel mortgage — shall apply to matters that are subject of proceedings before our courts prior to the effectivity of the PPSA. 
    • Moreover, on matters concerning the creation and perfection of security interests made before the effectivity of the PPSA, the prior law would also still be applicable.

Art. 2085. 
The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; 
(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for t he purpose. Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. 


Art. 2086. 
The provisions of Article 2052 are applicable to a pledge or mortgage.


Aquino:

1. Requirements Common to Pledge and Mortgage.
  •  Pledge and mortgage can be binding only if the following requirements are complied with: SAF ⭐
  1. They must be constituted to secure the fulfillment of a principal obligation;
  2. The mortgagor or pledgor must be the absolute owner of the thing pledged or mortgaged; and 
  3. The pledgor or mortgagor must have free disposal of the property. 
  • Article 2139 of the New Civil Code provides that the above-enumerated requirements apply to the contract of antichresis.
    • By the contract of antichresis the creditor acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit. (Art. 2132)
2. Who May Pledge of Mortgage. 
  • The pledgor and the mortgagor must have the following characteristics: OFLS
  1. The pledgor or the mortgagor must be the owner of the property pledged or mortgaged; 
  2. The pledgor or the mortgagor must have free disposal of the property to be pledged or mortgaged; 
  3.  If the pledgor or mortgagor does not have free disposal of the property, he must be legally authorized to pledge or mortgage; and 
  4. He must not suffer from any incapacity or disqualification provided by law. 
2.01. Need Not to Be Borrower or Obligor. 
  • The debtor himself or a third person (who is not a party to the principal obligation) may mortgage or pledge his property to secure the principal obligation.
    • It is not required that the third person benefitted from the principal contract.
    • This rule also applies to Antichresis.
  • It is well settled that an accommodation mortgage is allowed under Article 2085 of the New Civil Code. 
    • An accommodation mortgagor, ordinarily, is not himself a recipient of the loan, otherwise that would be contrary to his designation as such. 
    • The Supreme Court held that it is not always necessary that the accommodation mortgagor be apprised beforehand of the entire amount of the loan nor should it first be determined before the execution by the accommodation mortgagor of a Special Power of Attorney in favor of the debtor. 
    • This is especially true when the words used by the parties indicate that the mortgage serves as a continuing security for credit obtained as well as future loan availments.
  • The Supreme Court further explained the rights of an accommodation mortgagor: 
    • Spouses Sierra v. Paic Savings and Mortgage Bank, G.R. No. 197857, September 10, 2014:
      • As mere accommodation mortgagors, petitioners are not entitled to the proceeds of the loan, nor were required to be furnished with the loan documents or notice of the borrower's default in paying the principal, interests, penalties, and other charges on due date, or of the extrajudicial foreclosure proceedings, unless stipulated in the subject deed. As jurisprudence states, an accommodation mortgagor is a third person who is not a debtor to a principal obligation but merely secures it by mortgaging his or her own property. Like an accommodation party to a negotiable instrument, the accommodation mortgagor in effect becomes a surety to enable the accommodated debtor to obtain credit, as petitioners in this case.
2.02. Must Be The Owner and Must Have Free Disposal.
  • The principle nemo dat quod non habet applies to mortgage — one cannot give what is not his.
    • Example:
      • A usufructuary or a tenant cannot mortgage the property covered by the usufruct or lease because the usufructuary and the tenant are not the owners of the property. 
  • Calibo, Jr. v. Court of Appeals, G.R. No. 120528, January 29, 2001:
    • The Court ruled that no pledge was validly constituted because the pledgor was not the absolute owner of the tractor that was allegedly pledged to petitioner. 
    • The alleged pledgor's father, who left the equipment with him for safekeeping, owned the tractor. 
    • The Supreme Court explained that ''he who is not the owner or proprietor of the property pledged or mortgaged to guarantee the fulfillment of a principal obligation, cannot legally constitute such a guaranty as may validly bind the property in favor of his creditor, and the pledgee or mortgagee in such a case acquires no right whatsoever in the property pledged or mortgaged."
  • Philippine National Bank v. The Hon. Court of Appeals G R No L-34404 June 25, 1980: 
    • If the property is co-owned, neither one of the co-owners can mortgage the entire property. The effect of the mortgage shall be limited to the portion that may be allotted to the co-owner-mortgagor in the division upon the termination of the co-ownership.
    • It was pointed out that a co-owner who did not give her consent is not estopped from questioning the mortgage even if her husband was the one who notarized the mortgage contract.
  • Vda. De Bautista v. Marcos, G.R. No. L-17072, October 31, 1961: 
    • The Court ruled that the real estate mortgage was considered void because the mortgagor was not yet the owner of the mortgaged property, the free patent not having been issued yet when the mortgage was executed.
    •  However, even if a free patent had already been issued in favor of the mortgagor, the mortgage would still have been invalid if the mortgage had been executed within the five-year period after the issuance of the free patent because the law prohibits the taking of the public land given to the homesteader within such five-year period.
    • In other words, the mortgagor does not have free disposal of the land within the same period.
    • Incidentally, it should also be noted that the in pari delicto rule does not apply under this situation even if the mortgagor and the mortgagee entered into a contract of mortgage knowing that the mortgagor is prohibited from doing so. 
      •  The rule is that the in pari delicto rule does not apply when the contract is prohibited by law.
  • Cavite Development Bank v. Spouses Lim, G.R. No. 131679, February 1, 2000: 
    • It follows that the mortgagor must also be the owner at the time of the foreclosure sale. 
    • "A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with Article 1450 of the Civil Code, under which the mortgagor in default, the forced seller, becomes obliged to transfer ownership of the thing sold to the highest bidder."
  • Montano v. Ang, G.R. No. L-13057, February 27, 1993:
    • It is not necessary that the property — whether land or motor vehicle — is registered before the same can be mortgaged. 
    • Generally, what is important is that the mortgagor is already the owner of the property at the time the mortgage is executed.
  • Republic of the Philippines v. Lim, G.R. No. 161656, June 29, 2005: 
    •  A parcel of land can still be mortgaged even if there is pending expropriation proceeding against the same land. 
    • "Any person who deals with a property subject of expropriation does so at his own risk, taking into account the ultimate possibility of losing the property in favor of the government."
  • Philippine National Bank v. Hon. Court of Appeals, G.R. No. 121597, June 29, 2001: 
    • In cases where the owner of the property dies, the administrator of the decedent's estate can mortgage his (the decedent's) property. 
    • However, the administrator must obtain authority from the court. 
    • If the authority is obtained, the mortgage is valid as if it has been executed by the deceased himself.
2.03. Effect of PPSA. 
  • Under Republic Act No. 11057 otherwise known as the "Personal Property Security Act" (PPSA), even the lessee of goods can be a grantor of a security interest. 
  • A grantor includes the following: GTOT
    1. The person who grants a security interest in collateral to secure its own obligation or that of another person;
    2. A buyer or other transferee of a collateral that acquires its right subject to a security interest; 
    3. A transferor in an outright transfer of an accounts receivable; or 
    4. A lessee of goods.
  • However, it can be said that even under the PPSA it is also required for the grantor to be the absolute owner of either the thing or the right given as security. 
  • Thus, the lessee may not be the absolute owner of the goods but he is also the absolute owner of the right as lessee.
PROBLEM:
Vitug v. Abuda, C.R. No. 201264, January 11, 2016:
  • The petitioner acquired his property from the National Housing Authority. The petitioner's title contains an annotation of these restrictions: 
    • Entry No. 4519/V-013/T-234246 - RESTRICTION - that the Vendee shall not sell, encumber, mortgage, lease, sub-let or in any manner, alter or dispose the lot or right therein at any time, in whole or in part without obtaining the written consent of the Vendor. The National Housing Authority's restrictions were provisions in a contract it executed with petitioner. 
  • This contract bound petitioner to certain conditions before transferring or encumbering the property. 
    • Specifically, when the National Housing Authority sold the property to petitioner, petitioner became obligated not to sell, encumber, mortgage, lease. sublease, alter, or dispose the property without the National Housing Authority's consent. 
  • The petitioner thereafter mortgaged the property without complying with the restrictions. The mortgage is now being questioned allegedly because the petitioner does not have free disposal of his property. Is the mortgage void based on the same ground? 
  • No, the mortgage is not void. The petitioner has free disposal of his property. The restrictions embodied in the contract do not divest petitioner of his ownership rights. They are mere burdens or limitations on petitioner's jus disponendi. Thus, petitioner may dispose or encumber his property. 
    • However, the disposition or encumbrance of his property is subject to the limitations and to the rights that may accrue to the National Housing Authority. 
    • When annotated on the title, these restrictions serve as notice to the whole world that the National Housing Authority has claims over the property, which it may enforce against others. 
  • Contracts entered into in violation of restrictions on a property owner's rights do not always have the effect of making said contracts void ab initio. 
  • Contracts that only subject a property owner's property rights to conditions or limitations but otherwise contain all the elements of a valid contract are merely voidable by the person in whose favor the conditions or limitations are made. 
  • The mortgage contract entered into by petitioner and respondent contains all the elements of a valid contract of mortgage. The trial court and the Court of Appeals found no irregularity in its execution. There was no showing that it was attended by fraud, illegality, immorality, force or intimidation, and lack of consideration. 
  • At most, therefore, the restrictions made the contract entered into by the parties voidable by the person in whose favor they were made — in this case, by the National Housing Authority. Petitioner has no actionable right or cause of action based on those restrictions. 
  • Having the right to assail the validity of the mortgage contract based on violation of the restrictions, the National Housing Authority may seek the annulment of the mortgage contract. Without any action from the National Housing Authority, rights and obligations, including the right to foreclose the property in case of non-payment of the secured loan, are still enforceable between the parties that executed the mortgage contract. 
  • The voidable nature of contracts entered into in violation of restrictions or conditions necessarily implies that the person in whose favor the restrictions were made has two (2) options. It may either:
    1. waive its rights accruing from such restrictions, in which case, the duly executed subsequent contract remains valid; or 
    2. assail the subsequent contract based on the breach of restrictions imposed in its favor.
3. Common Features.
  • The common features of pledge and mortgage are as follows: RCAR
  1. Real Security.
    • It is of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. 
  2. Consideration. 
    • The consideration for the principal obligation is the consideration for the mortgage.
  3. Accessory. 
    • A guaranty cannot exist without a principal obligation.
    • Hence, principal obligation may be valid and binding even if the pledge or mortgage is not valid and binding; the pledge or mortgage is not binding if the principal obligation is not valid and binding. 
  4. Real Right. 
    • Real right is the power belonging to a person over a specific thing without a definite passive subject against whom such right may be exercised. 
    • It is enforceable against the whole world. Pledge and mortgage fall under the classification of real rights — that is, real rights of security. 
3.01. Security.
  • A mortgage and pledge are just securities for the principal obligation. 
  • There is no transfer of ownership from the mortgagor and pledgor to the mortgagee and pledgee. 
  • Warner,Barnes & Co., Ltd. v. Flores, G.R. No. L-12377, March 29, 1961:
    • Since there is no transfer of ownership, the pledgor and the mortgagor each bears the loss of the thing pledged or mortgaged under the maxim res periit domino suo. 
    • The principal obligation is not extinguished by the loss of the mortgaged property.
  • The Manila Banking Corporation v. Teodoro, Jr., G.R. No. 53955, January 13, 1989:
    • The intent of the parties prevails if the parties intend the contract to be one of pledge or of mortgage even if the document is called something else. 
    • Thus, even an assignment of rights may be considered a mortgage of the real intent of the parties is for the assignment to guarantee an obligation.
 3.02. Accessory.⭐
  • In the law on pledge and mortgage, the debt is the principal obligation. 
    • The pledge and mortgage are but incidents to the debt. 
    • Separated from the debt, the mortgage or pledge has no determinate value. 
    • The validity of the mortgage would also depend on the validity of the obligation secured.
  • The Bachrach Motors, Inc. v. Esteva, G.R. No. L-40233, February 14, 1934:
    •  Thus, customarily the foreclosure of the mortgage accompanied as it is by the debt follows in due course without mishap. 
    • Ordinarily also, the transfer of the debt carries with it the mortgage. 
      • So, a sale and delivery of notes secured by a chattel mortgage, although unaccompanied by an assignment of the mortgage itself, authorizes the purchaser to act as the mortgagee's agent and to do whatever he could have done to enforce the mortgage.
      • So likewise, whatever discharges the debt, discharges the mortgage. 
      • All this unless there be an agreement to the contrary
    • If the notes secured by a mortgage were assigned to a third party without assignment of the mortgage, the mortgage is extinguished.
      • If by special agreement the assignment of debt is not accompanied by the assignment of the accessory security, the security is ipso facto extinguished.
    • Thus, in The Bachrach Motors, Inc. u. Esteva case, the mortgagee-creditor transferred the debts evidenced by promissory notes to a third party but the mortgage that secured such obligations was not included in the transfer by express agreement of the parties.
      • Under the agreement between the mortgagee and the third person, the mortgagee retained the mortgage while the third party received the promissory notes. The third party sued the debtor based on the promissory notes while the mortgagee foreclosed the mortgage. 
    • The Court ruled that the foreclosure proceeding was, as a consequence, a nullity. The mortgage ceased to exist because there was no debt to which it could attach. 
      • The third party assignee, as a holder of the notes, could sue upon the notes. 
      • However, what cannot be countenanced is the separation of the notes from the mortgage and both the foreclosure of the mortgage and a suit on the notes. 
  • Philippine National Bank v. Banatao, G.R. No. 149221, April 7, 2009:
    • A void mortgage does not affect the principal obligation. 
    • The void mortgage contract can be an evidence of the indebtedness of the principal obligation. 
    • Thus, the void mortgage document can be presented in a collection case to claim payment of the loan that the mortgage secures.
3.03. Consideration.
  • The consideration of the accessory contract is the same as that of the principal contract.
  • For the debtor, the consideration of his obligation to pay is the existence of a debt. 
  • Central Bank of the Philippines v. The Hon. Court of Appeals, G.R. No. L-46710, October 3, 1985:
    • The Court ruled that the fact that when the mortgagor executed his real estate mortgage no consideration was then in existence as there was no debt yet because the bank had not made any release on the loan, does not make the real estate mor tgage void for lack of consideration.
      • It is not necessary that any consideration should pass at the time of the execution of the contract of real mortgage.
        • It may either be a prior or subsequent matter. 
      • But when the consideration is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created as a binding contract to pay 
      • And, when there is partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure 
      • Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due.
3.04. Waiver of Defect.
  • The mortgage may be annulled if it is defective as in the case where there was fraud. 
  • However, the right to attack the validity of a mortgage may be lost by a waiver of defects and objections, such as alleged fraud or misrepresentation. 
    • Mortgagors desiring to attack the validity of a mortgage should act with promptness. Otherwise, unreasonable delay may amount to ratification."
  • San Juan v. Court of Appeals, G.R. No. 110055, August 20, 2001:
    • A duly executed mortgage is presumed to be valid until the contrary is shown. 
    • To the party attacking rests the burden of proving its invalidity due to fraud, duress or illegality. 
    • It should be stressed that, as a general rule, courts will adopt such construction as will sustain rather than defeat the mortgage.
4. Secured Obligations. 
  • Pledge or mortgage may secure obligations or contracts that are: VVU-NPC
    1. valid
    2. voidable
    3. unenforceable
    4. natural
    5. pure
    6. conditional.
  • Article 2091 provides that the contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. 

De Leon:

Definition of pledge. 
  • Pledge is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfi lled, the thing delivered shall be returned with all its fruits and accessions. 
Kinds of pledge.
  •  Pledge may be either:  VL
  1. Voluntary or conventional
    • one which is created by agreement of the parties; or 
  2. Legal
    • one which is created by operation of law.
Characteristics of the contract. 
  • Pledge is: RAUS
    1. Real Contract
      • It is perfected by the delivery of the thing pledged by the debtor who is called the pledgor to the creditor who is called the pledgee, or to a third person by common agreement;
    2. Real Contract
      • It has no independent existence of its own; 
    3. Unilateral Contract
      • It creates an obligation solely on the part of the creditor to return the thing subject thereof upon the fulfillment of the principal obligation; and 
    4. Subsidiary Contract
      • It because the obligation incurred does not arise until the fulfillment of the principal obligation which is secured. 
Cause or consideration in pledge. 
  • Pledge is an accessory contract. 
    • Its cause insofar as the pledgor is concerned is the principal obligation. 
  • But if he is not the debtor (Art. 2085, par. 2.), the cause is the compensation stipulated for the pledge or the mere liberality of the pledgor. As an accessory contract, its validity would depend on the validity of the principal obligation secured by it. 
Essential requirements of pledge and mortgage. 
  • Pledge, mortgage (see Art. 2124.), chattel mortgage (Art. 2140.), and antichresis (Art. 2132.) are different species of that kind of contracts which are all intended to secure the performance of a principal and pre-existing obligation by specially subjecting to such security, property or the fruits thereof. 
  • While they possess certain common characteristics, each has certain special features which are not present in the others.
  1. Common requisites.
    • Articles 2085 and 2087 enumerate the essential requisites common to pledge and mortgage. 
      • Thus, a mortgage executed before the mortgagor became the owner of the property, such as before the issuance of a patent to the mortgagor, is void and ineffective
    • In all these contracts, ownership of the thing given as security is retained by the debtor. 
    • A pledge or mortgage, being merely an accessory agreement, its invalidity does not affect the principal contract of loan. 
      • While void, it can still be considered as an instrument evidencing an indebtedness.
  2. Necessity of delivery. 
    • In addition to the said requisites, the thing pledged must be delivered to the creditor or to a third person by common agreement.
    • Without delivery there can be no pledge because, precisely, in this delivery lies the security of the pledge. 
    • In a contract of mortgage, the mortgagor, as a general rule, retains the possession of the property mortgaged. 
Constituted to secure fulfillment of a principal obligation. 
  • Pledge and mortgage are purely accessory contracts like guarantee. 
    • They cannot exist without a valid obligation.
    • However, they may guarantee a:
      • voidable
      • unenforceable
      • natural obligation
  • The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. 
  • It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge (or mortgage) if the debt continues in existence and is not discharged by the transfer. Thus: 
    1. Lopez vs. Court of Appeals, 144 SCRA 671 [1982]:
      • Assignment of stocks executed by debtor together with indemnity agreement. 
      • In a case where the deed of assignment of stocks executed by the principal debtor in favor of his surety speaks of an outright sale, the fact that the debtor also executed an indemnity agreement (which connotes a continuing obligation of debtor to surety) to indemnify the surety against all losses which it may incur in consequence of it having become a surety upon a bond in favor of the principal creditor was held as inconsistent with the theory of an absolute sale and as proof (together with other circumstances) that the parties intended the stock assignment as a pledge to complement the indemnity agreement and thereby sufficiently guarantee the indemnification of the surety should it be required to pay the creditor. 
    2. Manila Banking Corp. vs. Teodoro, Jr., 169 SCRA 95 [1989]:
      • Assignment of rights executed to guarantee an obligation. 
      • An assignment of rights, receivables, title or interest under a contract to guarantee an obligation is, in effect, a pledge or mortgage and not an absolute conveyance of title which confers ownership on the assignee. In case of doubt as to whether a transaction is a pledge (or mortgage) or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests.
Constituted by the absolute owner. 
  • It is essential that the contract be constituted only by the absolute owner of the thing pledged or mortgaged, or at least by the pledgor or mortgagor with the authority or consent of the owner of the property pledged or mortgaged. 
    • A pledge or mortgage constituted by an impostor is void and the pledgee or mortgagee in such a case acquires no right whatsoever in the property. 
  • Cavite Development Bank vs. Lim, 324 SCRA 346 [2000]:
    • A foreclosure sale, though essentially a forced sale, is still a sale in accordance with Article 1458 of the Civil Code, under which the mortgagor in default, the forced seller, becomes obliged to transfer the ownership of the thing sold to the highest bidder who, in turn, is obliged to pay therefor the bid price in money or its equivalent. 
    • Being a sale, the rule that the seller must be the owner of the thing sold also applies in a foreclosure sale. 
    • This is the reason why Article 2085 of the Civil Code, in providing for the essential requisites of the contract of mortgage and pledge, requires, among other things, that the mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged, in anticipation of a possible foreclosure sale should the mortgagor default in the payment of the loan.

Property pledged or mortgaged.
  1. Future property.
    • Future property cannot be pledged or mortgaged.
  2. Property acquired subsequently.
    • A pledge or mortgage executed by one who is not the owner of the property pledged or mortgaged is without legal existence and registration cannot validate it. 
    • Thus, a mortgage executed before the mortgagor became the owner of the property, such as before the issuance of a patent to the mortgagor, is void and ineffective. 
    • It is the registration and issuance of the certificate of title that segregate public lands from the mass of public domain and convert it into private property. 
  3. Transfer of motor vehicles registered subsequently. 
    • The fact, however, that the chattel mortgage of a car was executed on a date earlier than the transfer of the registration certificate thereof in the name of the buyer-mortgagor but after the perfection of the contract of sale, does not render the said mortgage made by the latter in favor of the seller invalid, because the registration of the transfer of motor vehicles and of the certificates of license for their use in the Motor Vehicles Offices (now Land Transportation Offi ce) merely constitutes an administrative proceeding which does not bear any essential relation to the contract entered into between the parties. (Montano vs. Lim Ang, 7 SCRA 250 [1963].)
  4. Share in a co-ownership.
    • Under Article 493 of the Civil Code, “[e]ach co-owner shall have the full ownership of his part and of the fruits and benefits pertaining thereto, and he may, therefore, alienate, assign or mortgage it, and even substitute another person in its enjoyment, except when personal rights are involved. But the effect of the alienation or the mortgage, with respect to the co-owners, shall be limited to the portion which may be allotted to him in the division upon the termination of the co-ownership.” 
    • Hence, a mortgage of a conjugal property by one of the spouses is valid only as to one-half (1/2) of the entire property. 
  5. Property covered by Torrens title.
    • Article 2085 which requires that the mortgagor must have the free disposal of the property or at least have legal authority to do so, does not apply where the property involved is registered under the torrens system. 
    • While it is true that under Article 2085 it is essential that the mortgagor be the absolute owner of the property mortgaged, a mortgagee has the right to rely upon what appears in the certificate of title and does not have to inquire further. 
      • Stated differently, an innocent purchaser for value (like mortgagee) relying on a Torrens title issued is protected. 
      • This is the doctrine of “the mortgagee in good faith.’’ 
      • The public interest in upholding the indefeasibility of a certificate of title as evidence of lawful ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of the certifi cate of title. 
    • The rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks which should exercise more care and prudence in dealing with registered lands, than private individuals, for their business is one affected with public interest.
      • If a bank failed to observe due diligence in ascertaining the real owner of registered land given as security for a loan especially where the amount thereof is substantial, it cannot be considered a mortgagee in good faith. 
      • This doctrine can well apply to the GSIS, a government corporation created for the purpose of providing social security and insured benefi ts to government employees, whose funds come from the monthly contributions of its members.
Pledgor or mortgagor has free disposal of property or has legal authority. 
  • The act of pledging or mortgaging is an act of strict ownership involving as it does an alienation or transmission of real rights in property. 
  • Hence, the pledgor or mortgagor must have the capacity or authority to dispose of the property. 
    •  “Free disposal of the property” means that the property must not be subject to any claim of a third person.
    • “Capacity to dispose of property” means that the pledgor or mortgagor has the capacity or the authority to make a disposition of the property.
Thing pledged or mortgaged may be alienated.
  • This is also the essence of pledge and mortgage because they are constituted to secure the fulfillment of a principal obligation. 
    • Although this condition is not expressly stated in the contract, it is necessarily implied as an inherent element of the transaction of mortgage or pledge. 
    • So, the creditor does not automatically become the owner if at the time stipulated the obligation is still unfulfilled. (see Art. 2112.) 
  • The only remedy given to the mortgagee or pledgee is to have the security given sold at public auction and the proceeds of the sale applied to the payment of the obligation secured by the mortgage or pledge. 
    • The pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale.
    • In the sale of the property mortgaged or pledged, just as in any ordinary contract of sale, there must be a “meeting of the minds” with respect to the specific subject of the contract, i.e., that what the vendor is selling is exactly what the vendee is purchasing. 
    • In the absence of such understanding as to the identity of the property being sold, no sale may be considered perfected.
Creditor not required to sue to enforce his credit. 
  • The pledgee or mortgagee is not obligated to file an independent action for the enforcement of his credit. 
  • To do so would be a nullification of his lien and would defeat the purpose of the pledge or mortgage which is to give him preference over the property given as security for the satisfaction of his credit.
Pledgor or mortgagor may be a third person. 
  • It is not necessary that the principal debtor should always be the pledgor or mortgagor. 
  1. Accommodation pledge or mortgage.
    • It is not necessarily void simply because the accommodation pledgor or mortgagor did not benefit from the same. 
      • Ordinarily, he is not himself a recipient of the loan, otherwise that would be contrary to his designation as such. 
    • It is not always necessary that he should be appraised beforehand of the entire amount of the loan.
    • As long as valid consent was given, the fact that the loan was solely for the benefit of the debtor would not invalidate the pledge or mortgage.
  2. Duty of mortgagee to make proper inquiry. 
    • The creditor, however, is required to exercise due care and prudence by making proper inquiry where the debtor borrows money and mortgages another person’s property to secure the loan without the consent of the latter and he is guilty of negligence if he relied solely on the representations made by the debtor, particularly where the creditor is engaged in the banking business — a business affected with public interest. 
    • Where the mortgagee acts with undue haste in granting mortgage loans and does not ascertain the ownership of the lands being mortgaged, as well as the authority of the supposed agent executing the mortgage, it cannot be considered an innocent mortgagee. 
    • So long as valid consent was given, the fact that the loan was given solely for the benefit of the principal debtor would not invalidate the mortgage.
  3. Where mortgage gratuitous. 
    • Where the contract of mortgage (or pledge) is purely gratuitous, the same should be strictly construed. 
    • In accordance with Article 1378 of the Civil Code, said contract should be so interpreted as to effect “the least transmission of rights or interests” as possible. 
  4. Liability for deficiency.
    • The pledgor or mortgagor who pledged or mortgaged his property to guarantee an indebtedness of another person, without expressly assuming personal liability for such debt, is not liable for the payment of any deficiency, should the property not be sufficient to cover the debt. 
    • He is not solidarily bound with the principal obligor.
      • Although pledge or mortgage may be an accessory contract, that fact alone does not make a third party pledgor or mortgagor solidarily bound with the principal debtor in fulfilling the principal obligation. 
      • His liability extends only to the property pledged or mortgaged. 
      • Should there be any deficiency, the creditor has recourse on the principal debtor, the signatory to the principal contract, who remains to be primarily bound. 
    • A special power of attorney authorizing another to mortgage one’s property as security of the former’s obligation does not of itself make the person executing the same a co-mortgagor of the debtor. 
      • Thus, it has been held that an accommodation mortgagor as such is not in any way liable for the payment of the loan or principal obligation of the debtor/borrower. 
      • His liability extends only up to the loan value of his mortgaged property and not to the entire loan itself. 
      • Hence, he may redeem his mortgaged property by paying only the winning bid price thereof (plus interest and expenses there on) at the public auction sale.
Pledge and real mortgage distinguished.
  • The following are the distinctions. CDR
    • Pledge 
      • It is constituted on movables.
      • The property is delivered to the pledgee, or by common consent to a third person.
      • It is not valid against third persons unless a description of the thing pledged and the date of the pledge appear in a public instrument.
    • Mortgage
      • It is constituted on immovables. 
      • Delivery is not necessary.
      • It is not valid against third persons if not registered.
Art. 2087.
It is also of the essence of these contracts that when the principal obligation becomes due, the things In which the pledge or mortgage consists may be alienated for the payment to the creditor. 

Art. 2088. 
The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.

1. Security Only. 
  • Mortgage and pledge merely secure the principal obligation. 
  • The delivery of the thing in pledge does not amount to payment.
  • In the same manner, the filing of an action for replevin preparatory to foreclosure by the mortgagee in the chattel mortgage does not amount to an action for specific performance. 

2. Pactum Commissorium.
  • This is an agreement providing the creditor-mortgagee/pledgee's automatic appropriation of ownership in case of non-payment of the principal obligation. 
    • It is a stipulation that enables the mortgagee or pledgee to acquire ownership of the pledged or mortgaged property without the need of any foreclosure proceedings or public auction.
  • This agreement (pactum commissorium or what amounts to pactum commissorium although referred to by another name) is null and void.
  • The debtor may waive the security and just file an action for specific performance for the payment of the obligation. 
    • However, if he wants to rely on the security, he must foreclose or have the property sold for the payment of the debt. 
    • The creditor cannot appropriate for himself the things given by way of pledge or mortgage, or dispose of them.
2.01. Requisites.
  • The requisites of pactum commissorium are as follows: P-S
  1. there should be a property mortgaged or pledged by way of security for the payment of the principal obligation; and 
  2. there should be a stipulation for automatic appropriation by the creditor of the thing given as security in case of non-payment of the principal obligation within the stipulated period.
  • Nakpil v. Intermediate Appellate Court 225 SCRA 456, 467 (1993):
    • The Court said that the arrangement entered into between the parties, whereby Pulong Maulap was to be considered sold to him (respondent) in case the petitioner fails to reimburse Valdes, must be construed as tantamount to pactum commissorium which is expressly prohibited by Article 2088 of the Civil Code. 
    • There was to be automatic appropriation of the property by Valdes in the event of failure of petitioner to pay the value of the advances. Thus, contrary to respondent's manifestation, all the elements of a pactum commissorium were present: 
      1. there was a creditor-debtor relationship between the parties; 
      2. the property was used as security f or the loan; and 
      3. there was automatic appropriation by respondent of Pulong Maulap in case of default of petitioner. 
  • Pactum Commissorium may be in writing or it may also be implied from the circumstances. 
    • Spouses Pen v. Spouses Julian, G.R. No. 160408, January 11, 2016:
      • The Court ruled that the transaction was a pactum commissorium and not a dacion en pago because of the following circumstances: 
      •  The first element was present considering that the property of the respondents was mortgaged by Linda in favor of Adelaida as security for the farmer's indebtedness. As to the second, the authorization for Adelaida to appropriate the property subject of the mortgage upon Linda's default was implied from Linda's having signed the blank deed of sale simultaneously with her signing of the real estate mortgage. The haste with which the transfer of property was made upon the default by Linda on her obligation, and the eventual transfer of the property in a manner not in the form of a valid dacion en pago ultimately confirmed the nature of the transaction as a pactum commissorium.
2.02 No Pactum Commissorium. 
  • The prohibition against pactum commissorium presupposes the existence of a pledge or mortgage. 
  • It follows that there can be no pactum commissorium if the contract is a contract of sale rather than a pledge or mortgage. 
  • Promise to Transfer.
    • A promise of the mortgagor-debtor to transfer a property in favor of the creditor in case of non-payment is not pactum commisorium because there is no automatic transfer. 
    • The mortgagor is free to sell or not to sell the property. 
    • Agoncillo v. Javier. G.R. No. L-1261, August 7, 1918:
      • The agreement to convey the house and lot at an appraised valuation in the event of failure to pay the debt in money at its maturity is, however, in our opinion, perfectly valid. 
      • It is simply an undertaking that if the debt is not paid in money, it will be paid in another way. As we read the contract, the agreement is not open to the objection that the stipulation is a pacto commissorio. 
      • It is not an attempt to permit the creditor to declare a forfeiture of the security upon the failure of the debtor to pay the debt at maturity. It is simply provided that if the debt is not paid in money it shall be paid in another specific way by the transfer of property at a valuation. 
      • Of course, such an agreement, unrecorded, creates no right in rem; but as between the parties it is perfectly valid, and specific performance of its terms may be enforced, unless prevented by the creation of superior rights in favor of third persons."
  • Extinguishment.
    • There is no pactum commissorium if the principal obligation is extinguished by:
      • dacion en pago
      • novation or 
      • cession. 
    • Thus, if the mortgaged property is later conveyed in a true dacion en pago, the assignment of the property extinguishes the monetary debt. 
      • In pactum commissorium, the property is given initially as a security but later appropriated without the benefit of foreclosure.
    • The parties may also voluntarily novate the agreement later in such a way that the property will be conveyed to the mortgagee.
      • These are not covered by the prohibition against pactum commissorium because these are acts or transactions that are agreed upon, not at the time the mortgage was constituted but only thereafter.
  • Authority to Sell. 
    • An authority to sell and the appointment of the mortgagee as attorney-in-fact to sell and dispose of real rights does not, by itself, constitute pactum commissorium. 
      • Such authority is consistent with Article 2087.
    • El Hogar Filipino v. Paredes, G.R. No. L-19843, October 3, 1923:
      • In a case decided under Article 1859 of the Old Civil Code which contained an identical prohibition that is found in Article 2088 of the New Civil Code, the Supreme Court ruled that while the law prohibits the creditor from appropriating to himself the things pledged or mortgaged, and from disposing of them, "this does not mean that a stipulation is prohibited whereby the creditor is authorized, in case of nonpayment within the term fixed by the parties, to sell the thing mortgaged at public auction, or to adjudicate the same to himself in case of failure of said sale, nor is there any reason whatever to prevent it; on the contrary, Article 1872 (now Article 2112) expressly authorizes this procedure in connection with pledge, even if it may not have been expressly stipulated."
      • The Supreme Court ruled: 
        • Considering that the judgment appealed from does not violate articles 1859 and 1255 of the Civil Code, because the stipulation, by virtue of which the debtor gives the mortgagee the right to sell the thing mortgaged at public extrajudicial sale to make payment of the debt, does not imply an appropriation thereof, but is merely a derivative of the authority granted the contracting parties in the second of the two articles aforementioned, which authority is not against the law, since what it prohibits is only the acquisition by the creditor of the property mortgage, merely by reason of the nonpayment of the debt, and the above state stipulation simply authorizes him to sell it with the aforesaid conditions, which authorization is inherent in ownership, and is not against morals and public order, for what is authorized by the Code itself in article 1872 as to the pledge, can never be held to be unjust with respect to the mortgage when the debtor has expressly agreed upon such manner of making payment. (Decision of the supreme court of Spain of October 21, 1902; 94 Jur. Civ., 364. See also 94 Jur. Civ. 504; 96 Jur. Civ., 801.)
        • The same question has been considered in innumerable cases by the English and American tribunals, and the conclusion almost unanimously reached by those courts is that a stipulation in a mortgage conferring a power of sale upon the mortgagee is valid. The history of this doctrine, as abstracted from the pages of well-known legal encyclopedia is briefly this: The right to foreclose a mortgage of personalty by the exercise of a power of sale and without resorting to a bill in equity was sanctioned by Lord Hardwicke in 1742, and the power had been recognized even before that day. In the case of mortgages of realty the recognition of the validity of power of sale encountered considerable opposition; and doubts as to its validity were not infrequently expressed far into the nineteenth century. In 1811, however, the power was recognized as being a good source of title, in a few years the practice of inserting the provision had become general. Having once been recognized in England, the power of sale soon came to be an ordinary incident in the execution of a mortgage and was usually inserted as a matter of course; and so fully did the exercise of the power accord with considerations of public policy, that, by parliamentary enactment, the power of sale can now be exercised in England by the mortgage although a provision therefor be omitted from the deed. In America also numerous early expressions are to be found which question the validity of the power of sale or deny it altogether; but legislative and judicial opinion soon eradicate this notion almost entirely, and it is now settled in America as in England that, in the absence of statutory requirement of judicial foreclosure, the exercise of the power of sale contained in a mortgage or deed of trust will vest a good title in the purchaser and cut off the equity of redemption. Such is the doctrine maintained in the Federal courts of the United States and the courts of every America State with the exception of one only. 
        • The correctness of the foregoing statement is corroborated by the conclusions reached by other writers with reference to the same point. For instance, we find it stated in Ruling Case Law that the validity of the provision conferring a power of sale on the mortgagee is no longer open to doubt; and the author of the monographic essay on Mortgages in the Cyclopædia of Law and Procedure has this to say: "A power of sale in a mortgage or deed of trust, authorizing foreclosure by advertisement and sale without resort to the courts, is not contrary is perfectly legal and valid, except in a few states, where the statutes expressly forbid the exercise of such powers and require all foreclosures to be effected by judicial proceedings."
        • In the extensive treatise on Mortgages written by Mr. Leonard A. Jones a full discussion of this and allied topics will be found, wherein the learned author points out that under the Roman Law a provision giving the mortgagee a power to sell extrajudicially was recognized as valid, and the history of the doctrines is fully traced in all its aspects through the modern decisions of the English and American courts.
        • x x x
        • In the light of the foregoing authorities it is evident that the power of sale conferred on the creditor in the mortgage now under consideration cannot be declared to be in contravention either of law, morals, or public, policy.

Art. 2089. 
A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor. 

Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied. 

Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is expected the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. 

The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied.

Art. 2090.
The indivisibility of a pledge or mortgage Is not affected by the fact that the debtors are not solidarity liable. 

1. Indivisible. 
  • When several things are given to secure the same debt in its entirety, all of them are liable for the debt and the creditor does not have to divide his action by distributing the debt among the various things mortgaged.
    • Even if only part of the debt remains unpaid, all the things are liable for the balance of the debt.
    •  The law is explicit that a mortgage obligation is one and indivisible. 
  • Philippine National Bank v. Amores, G.R. No. L-54551 November 9, 1987:
    • Every portion of the property mortgaged is answerable for the whole obligation as soon as the latter falls due. 
    • The mortgagor cannot opt, much less compel the mortgagee, to apply any payment made by him on a specific portion of the mortgaged property to effect release. 
    • Neither may the mortgagee apply payments made to it on, and consequently release, a portion of the mortgaged property and effect foreclosure on the rest."
  • Dayrit v. Court of Appeals, G.R. No. L-29388, December 28, 1970:
    • The mortgage is indivisible even though the debt may be divided and even though the debtors are solidarily liable. 
  • Sps. Gonzales v. GSIS, G.R. No. L-51997, September 10, 1981: 
    • Generally the divisibility of the principal obligation is not affected by the indivisibility of the mortgage. 
      • The mortgage obligation is indivisible; that is, it cannot be divided among the different lots. 
    • A real estate mortgage voluntarily constituted by the debtor on two or more parcels of land is one and indivisible. 
      • Each and every parcel under mortgage answers for the totality of the debt. 
      • Being indivisible, the full value of the one parcel being paid should be applied in full to the outstanding loan obligation without any discounting."
    • Example:
      • Two parcels of land were mortgaged in one real estate mortgage contract to secure a P1 million obligation. 
      • If the debtor-mortgagor paid P600,000.00, the debtor-mortgagor cannot ask for the release of one of the properties from the mortgage because the mortgage is indivisible. 
  • The rule on indivisibility under Article 2089 of the New Civil Code does not apply when each of the several things given in mortgage guarantees only a determinate portion of the credit. 
    • This exception contemplates separate debts secured by the properties.
  • The indivisibility is present even if the debtors are jointly liable. 
  • If one of the debtors, mortgagors or pledgors dies, the heirs cannot ask for proportionate extinguishment of the pledge or mortgage.
    • Example:
      1. If A and Bare joint debtors who mortgaged a parcel of land to secure a P200,000.00 loan from Mr. C, the mortgage is still indivisible despite the joint nature of the obligation.
        • Mr. C can compel Mr. A to pay only P100,000.00 and upon payment by Mr. A, the latter cannot ask for the release of a portion of the property from the mortgage.
      2. If the creditor dies, an heir cannot extinguish the pledge or mortgage to the prejudice of other heirs.
        • Thus, if Mr. A, the father of B and C (his only heirs), lent P1 million to Mr. D who executed a mortgage over his (Mr. D's) property and thereafter Mr. A dies, B cannot release part of the mortgage to the prejudice of C. 
        • The Supreme Court, however, noted that the rule of indivisibility of the mortgage as outlined by Article 2089 presupposes several heirs of the debtor or creditor. 
        • Hence, the rule of indivisibility of a mortgage in Article 2089 cannot apply if there is only one heir.
        • However, the inapplicability of Article 2089 if there is only one heir refers only to the rules with respect to the heirs; the indivisible character of mortgage is present even if there is only one creditor and one debtor.
  • Yu v. Philippine Commercial International Bank, G.R. No. 147902, March 17, 2006:
    • The indivisibility of a real estate mortgage is not violated by conducting two separate foreclosure proceedings on mortgaged properties located in different provinces as long as each parcel of land is answerable for the entire debt.
    • The rule on indivisibility of the real estate mortgage cannot be equated with the venue of foreclosure proceedings on mortgaged properties located in different provinces since these are two unrelated concepts.
PROBLEMS:
Philippine National Bank v. Mallorca, G.R. No. L-22538, October 31, 1967:
  • Way back in 1950, RL mortgaged a 48.965 square meter-parcel of land situated in Passi, Iloilo to the P Bank as security for a loan of ₱1,800.00. The lot was covered by a Transfer Certificate of Title and the mortgage was duly recorded. 
  • On January 12, 1958, while the mortgage above-described was in full force and effect, and without P Bank's knowledge and consent, RL sold to PM 20,000 square meters of the mortgaged land. Upon order of a court, P Bank was directed to deliver the title to the Register of Deeds. 
  • The Register of Deeds then cancelled the title, issued a new one, making two co-owner's copies of the title - one each for RL and PM. P Bank's mortgage lien was annotated on both copies.  RL failed to pay her mortgage debt.  P Bank foreclosed the mortgage extrajudicially and thereafter, a certificate of sale was issued to P Bank as the highest bidder.  This certificate of sale was registered with the Register of Deeds. 
  • In March 1959 PM sued P Bank to enforce her right of redemption with damages. Later, however, PM failed to exercise her right of redemption as decreed by the court but she refused to surrender her copy of the title. 
  • PM's stand is that her undivided interest consisting of 20,000 square meters of the mortgaged lot, remained unaffected by the foreclosure and subsequent sale to P Bank's. 
  • Is PM's argument correct?
  • PM's argument is not correct. 
  • PM's position clashes with precepts well- entrenched in Article 2126 of the Civil Code that a "mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted." 
  • Sale or transfer cannot affect or release the mortgage. 
  • A purchaser is necessarily bound to acknowledge and respect the encumbrance to which is subjected the purchased thing and which is at the disposal of the creditor in order that he, under the terms of the contract, may recover the amount of his credit therefrom. 
  • For a recorded real estate is a right in rem, a lien on the property whoever its owner may be. Because the personality of the owner is disregarded; the mortgage subsists notwithstanding changes of ownership; the last transferee is just as much of a debtor as the first one; and this, independent of whether the transferee knows or not the person of the mortgagee. So it is, that a mortgage lien is  inseparable from the property mortgaged. All subsequent purchasers thereof, must respect the mortgage, whether the transfer to them be with or without the consent of the mortgagee. For, the mortgage, until discharge, follows the property.
  • And then, militating against PM's cause is one other special feature of a real mortgage - its indivisibility. Mortgage indivisibility means that each and every parcel under mortgage answers for the totality of the debt. It does not really matter that the mortgagee, as in this case, did not oppose the subsequent sale. Naturally, because the sale was without P Bank's knowledge. Even if such knowledge is chargeable to P Bank, its failure to object to the sale could not have any impairing effect upon its rights as mortgagee. After all, a real mortgage is merely an encumbrance; it does not extinguish the title of the debtor, whose right to dispose- a principal attribute of ownership - is not thereby lost. And, on the assumption that P Bank recognized the efficaciousness of the sale by RL of a portion of the mortgaged land to PM, which RL "had the right to make" and which anyway P Bank "cannot oppose," P Bank cannot be prejudiced thereby, for, at all events, "such sale could not affect the mortgage, as the latter follows the property whoever the possessor may be."
  • On PM's part, she cannot rightfully deny the mortgage lien on the portion of the land she purchased. 
    1. Registration of the mortgage in the Register of Deeds is notice to all persons of the existence thereof.
    2. By express provision of Section 39 of the Land Registration Act, "every subsequent purchaser of registered land who takes a certificate of title for value in good faith shall hold the same free of all encumbrance except those noted on said certificate." 
    • Clear implication exists that if an encumbrance is so noted, that purchaser is bound thereby. 
2. In 1998, Bobby borrowed ₱1 million from Chito payable in two years. The loan, which was evidenced by a promissory note, was secured by a mortgage on real property. No action was filed by Chito to collect the loan or to foreclose the mortgage. But in 2011, Bobby, without receiving any amount from Chito, executed another promissory note which was worded exactly as the 1998 promissory note, except for the date thereof, which was the date of its execution. 
  • Can Chito demand payment on the 2011 promissory note in 2014?
    • Yes, Chito can demand payment of the 2011 promissory note in 2014. It should be noted that an action based on a written contract prescribes in 10 years. 
    • Hence, the 1998 promissory note already prescribed 10 years after the due date, or in the year 2000. 
    • However, there is in effect a valid novation in 2011. While the expired obligation was only a natural obligation after the lapse of 10 years, the execution of the 2011 promissory note novated the obligation to extend the term of the agreement.
  • Can Chito foreclose the real estate mortgage if Bobby fails to make good his obligation under the 2011 promissory note? 
    • No. Chito cannot foreclose the mortgage. The mortgage already prescribed together with the criginal 1998 loan because it is a mere accessory obligation. Novation of the natural obligation in 2011 does not result in the novation of the mortgage. The mortgage was not revived and the effect of prescription was not rendered erased by the novation of the principal obligation.


 Art 2091. 
The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. 

Art 2092. 
A promise to constitute a pledge or mortgage gives rise only to a personal action between t he contracting parties, without prejudice to the criminal responsibility incurred by him who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew were subject to some burden, or by misrepresenting himself to be the owner of the same. 

1. Promise to Mortgage of Pledge. 
  • Article 2092 of the New Civil Code involves a consensual contract to mortgage or pledge. 
  • The mortgagee or pledgee acquires no real right of encumbrance until the mortgage or pledge is validly constituted. 
  •  However, the prospective mortgagee or pledgee can file an action for specific performance against the debtor who promised to constitute the contract. 
2. Estafa.
  • Article 2092 recognizes the possible criminal responsibility that may be incurred by him who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew were subject to some burden, or by misrepresenting himself to be the owner of the same.
  • This may include cases of estafa by means of false pretenses under Article 315(2)(a) of the Revised Penal Code.
    • Art. 315. Swindling (estafa). – Any person who shall defraud another by any of the means mentioned hereinbelow shall be punished by:
      • 2. By means of any of the following false pretenses or fraudulent acts executed prior to or simultaneously with the commission of the fraud:
        • (a) By using fictitious name, or falsely pretending to possess power, influence, qualifications, property, credit, agency, business or imaginary transactions, or by means of other similar deceits.


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